Council’s Top Trade Expert Knocks ‘Protectionism’ of Gephardt and Dean

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Jagdish N. Bhagwati, the Andre Meyer senior fellow in international economics and a long-time advocate of free trade, says the unrestricted flow of goods “is extremely important” in order to raise living standards. He cites China and his native India as examples of countries where poverty has been reduced as trade restrictions have eased.

Bhagwati, a university professor at Columbia and a registered Democrat, says he is concerned by the “protectionism” voiced by Democratic presidential candidates Dick Gephardt and Howard Dean. He says that by insisting that all trading partners have labor and environmental standards equivalent to those in the United States, the candidates are in effect pushing protectionism.

He was interviewed by Bernard Gwertzman, consulting editor for cfr.org, on January 15, 2004.

In general, how important is free trade?

It is extremely important. I am not saying this because of ideological or theoretical grounds. In the years following World War II, countries that remained open or took advantage of international opportunity in one way or the other— such as the Far Eastern economies, which began by looking inward but then decided to go outward in the 1960s— wound up producing very high rates of growth to go along with their export performances. Countries that turned inward— India, Brazil, Ghana, Egypt, and others— did not progress very far. A country such as my native India found its low share of trade to GNP declining yet further.

If India’s trade were 1 percent of GNP, what was the U.S. percentage?

The United States was more like 6 to 7 percent in those years. But it has more than doubled in the last few years. India’s kept going down. The Indian and Chinese economies were both inward looking until the mid-1980s. Growth rates were very low. As a result, poverty increased.

But since the mid-1980s, both economies have opened up, China much more [than India]. They have also opened up to foreign investment. China has attracted an enormous amount. India still has among the highest average tariffs in the world on manufactures, at around 29 percent until last year. Restrictions on direct foreign investment have been steadily reduced but still have some way to go. The growth rate picked up in both countries, and poverty has declined. This was upsetting to a lot of people who feared that if one could show that poverty declined because of an increase in growth rates, somehow we would lose our passion and fire for social changes such as land reform. I don’t see any contradiction in having both growth and social change.

Talk about the United States. You told me you are a registered Democrat. Does it bother you that several Democratic candidates for the presidency seem to espouse protectionist policies?

Very much so. I think that U.S. protectionism is taking the form of seeming to try to raise labor and environmental standards around the world. One type of protectionism is “import protection”: you see competition is growing from abroad, and you put up your barriers. But an alternative, if you did not want to appear to be protectionist, is to say foreign competitors don’t have “adequate standards” of all kinds. Or, as in the debate about the North American Free Trade Agreement [NAFTA] in 1994, critics used to say, “Mexico’s democracy was not good enough.” All these are ways of saying, “This is all unfair trade, and therefore they have to raise their standards or we won’t trade with them.” The expectation of people who argue that way is that if we raise the standards, it will increase the cost of production, and accomplish the same result as high tariffs.

So, it is a form of what one might call “export protectionism” instead of import protectionism. It, unfortunately, is what [candidate for the Democratic presidential nomination] Dick Gephardt has always bought into. It is not clear to me if he understands what he is doing. And what is shocking is that [fellow candidate] Howard Dean, suddenly catapulted into presidential politics, has bought into the same line— that we must have internationally identical labor and environmental standards or we won’t trade with these countries. He once said early on that he would reopen all trade treaties and require that the same standards be imposed, but that is the same thing as saying that we are going to raise the cost of production abroad. That disrupts the trade process, which is a powerful engine for spreading prosperity.

Talk about the views of American people on this question. Americans of course love to buy inexpensive imported goods. Wal Mart could not survive without quality, low-priced imports. At the same time, political polls show most Americans favor protectionism. How do you explain this dichotomy?

I think part of the problem is that people are not quite coherent. Even people like President Bill Clinton who, after about a year of hesitation, when it was not clear in which direction he wanted to swing on trade, [ultimately] became a very powerful proponent of trade. But I don’t think he ever [effectively] put his views across to the unions and to other Democratic Party constituencies, the notion that [trade] doesn’t hurt them but in fact helps them.

I think if you look at the situation without preconceptions, [it is clear there will be] a standard division of labor. We will need technical jobs [in the United States] and they will multiply in number. They are already multiplying. These are well-paying jobs. These are not “flipping hamburgers” jobs. There is concern now about the outsourcing of jobs [overseas]. But look at what is going on right now— Infosys, one of the biggest firms in India, is coming out to our part of the world, setting up subsidiaries, and hiring people here. There is a complex process going on, and we retain considerable advantages.

Take another example. Elementary semiconductors were [flooding the United States] from Japan and then South Korea. There was an investigation in Congress, and a great hullabaloo, about how the Far East will overtake us. Our reaction was to move “up hill,” to shift to production of the sophisticated chips that Intel makes now. I think that flexibility of response, and the endless numbers of jobs that are created [by such flexibility], cannot be foreseen. Who would have thought these things would have been possible 10 years ago? I think there is enough in it for us. We have the smarts. We have the education. We have the flexibility, because our people, more than anybody else, turn over their lives, and people begin their second careers at 40 or 50.

We are positioned to take advantage of this in a dramatic way. This doesn’t mean that, now that international trade is 12 percent of our GNP, we don’t need things like adjustment assistance [for affected workers]. But we have it. There has not been one trade bill passed since President Kennedy’s time without legislation to help people who might be hurt. The latest trade promotion act has a substantial scheme: if you are bumped from your job and forced to take a lesser paid position, an insurance provision kicks in to pay you the difference for three years. This is not a society that just says, “Let the market work.”

Where does President Bush stand on all this?

There was a huge difference between the World Trade Organization’s ministerial meeting in Seattle in 1999 and [the WTO meeting in] Cancun last year. President Clinton, by the time he got to Seattle, was probably exhausted from the Uruguay Round [of trade negotiations] that finally culminated with an accord in 1994 and NAFTA battles that continued throughout his time in office. His advisers and he had not thought through the implications of going to Seattle, and the incoming reports of all these demonstrations against “globalization” being planned had not registered. Clinton did not manage it well.

By contrast, Bush came into office wanting to succeed in the Doha round of trade talks. His special trade representative, Robert Zoellick, had actively sought to get the Doha talks launched in Qatar right after 9/11. Then at Cancun, the first ministerial meeting after Doha, one of the sticking points was intellectual property protection for pharmaceuticals. There had been tough restrictions on what could be done by third world countries to supply [drugs to] other third world countries that do not have manufacturing capacity. Restrictions like that did not sit well with a lot of developing countries, and the non-governmental organizations [NGOs] that advised them were up in arms.

We were being denounced by the NGOs and the developing countries. The United States, under pharmaceutical lobby pressure, held out against making the necessary adjustments or concessions. I was convinced that President Bush in the end, more than on any other lobbying issue, would be able to get the drug companies to make concessions: after all, it meant bringing together less than ten CEOs and bribing or threatening them to agree to the necessary concessions, a task that was far more simple than getting numerous powerful lobbying interests in sectors such as agriculture to accept compromises. I was looking therefore to see if we would make the requisite TRIPs/medicines concession at Cancun: that would be a surefire signal that President Bush wanted to make headway in the Doha negotiations. And the administration did mange to make that concession.. That’s when I felt that the president was serious about the Doha Round and about ensuring a successful conclusion to this multilateral effort at freeing trade.

There was a big fight over farm subsidies.

We goofed up on the U.S. farm bill. There was no international law on what you can do in terms of agricultural subsidies. So the Bush administration made the mistake of going ahead with new production subsidies [for U.S. farmers], which were legally consistent with the World Trade Organization obligations. What the administration forgot was that it doesn’t sit well when you open up a new round [of trade talks] and then you say you have increased your subsidies and in effect raised your protections. The Bush administration was astonished by the worldwide reaction. Other countries and organizations were saying: “You hypocrites. You are trying to push the Doha round, telling all of us to liberalize [trade policies], and here you are raising protection.” I met countless numbers of American bureaucrats who could not believe the reaction they were running into overseas.

So, despite the U.S. agreement on medicines, the so-called Trade Related Intellectual Property (TRIPS), and despite the fact that Zoellick was ready to [negotiate] on agriculture, Brazil and other agricultural exporters said, “We don’t have to do anything. You have to do everything.” And that’s when Zoellick got really frustrated and the Cancun round ended last September without any agreement on agriculture.

What’s happened since?

Zoellick’s recent letter to other trade ministers calling for a resumption of negotiations is very conciliatory, and I think they will move ahead. The only way concessions can be made on agricultural subsidies is if you go multilateral. Think of production subsidies, which the United States has: they can’t be cut for just one trading partner. When it comes to export subsidies— which are the big issue for the Europeans and a little bit for us too— we will cut export subsidies say, for Brazil, in a bilateral negotiation, but the Europeans won’t. Then the Europeans will have an advantage. My point is that if subsidies are the name of the game in agriculture, if the foreign countries that export want to remove subsidies, they have to go multilateral. I think the other countries will respond. They all want the U.S. subsidies to decline.

Can free trade genuinely help the poorest countries?

That’s my big concern. There is a difference between the openness of our market and the penetrability of that market. What worries me is whether we can do very much for African exports: for instance, if we open the doors and New Zealand, Argentina, Brazil, and Thailand all get into the markets, but African countries are unable to [compete]. The second problem is that a lot of countries will continue being importers of food. Right now, 42 of the 49 so-called least developed countries are importers of food and agricultural products. The assumption is that if we remove subsidies and raise agricultural prices, somehow they will be able to export to us. That’s not so clear. I am accused of being the world’s No. 1 free trader, but I know enough about the subject to know that if two people liberalize, a third might be hurt.

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